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Is Intel Stock Still a Bargain at $28 Per Share?

Shares of chipmaker Intel (NASDAQ: INTC) have powered nicely higher in 2014, rising 8.8% even as the Nasdaq is up only 3.9% year to date. As the stock's price has risen and the company has regained its status as the world's most valuable chipmaker by market capitalization, edging out mobile behemoth Qualcomm (NASDAQ: QCOM) , are the shares still a compelling buy?

The PC market is stabilizing and could return to growthOver 60% of Intel's revenue base is dependent on the company's performance in the PC market. While the overall market has remained soft as tablets have become more popular, Intel has been aggressive in trying to drive more attractive notebooks, convertibles, and even desktops at ever-lower prices in order to try to win back consumer wallet share (as well as market share against longtime rival Advanced MicroDevices).

If you look at Intel's year-over-year unit growth numbers in both notebooks and desktops over the last couple quarters, you'll see that the company's efforts have been surprisingly effective. Overall PC unit volume was up 3% in the fourth quarter of 2013 from the year-ago quarter, and up another 1% year over year in the first quarter of this year from first-quarter 2013. While Intel is shipping more lower-cost products to drive volume growth, those products carry a good cost structure, allowing for gross margins to stay flat-to-up.

As Intel pushes further into the realm of convertibles -- particularly with its more expensive Core processors -- it stands a pretty strong chance of returning its PC client group to year-over-year growth even as the "traditional" clamshell/desktop market stays weak. The line between tablets and PCs is blurring, and if Intel can successfully push its products into those converged devices then this would be a pretty big "win" for the company.

Tablet market likely belongs to IntelIntel CEO Brian Krzanich has indicated repeatedly that the company is on track to ship north of 40 million tablet processors for the year. If Intel is successful, then it will have gone from a minuscule player in the market to a company with a 15%-20% share of the estimated 260 million tablets to be shipped this year. Excluding Apple iPad, which research house BlueFin says should ship about 76 million units this year, this works out to over 22% of the non-Apple tablet market. Pretty solid, right?

If Intel could do this kind of growth with its Bay Trail/Merrifield/Moorefield processors, then next year with an improved product lineup there's no reason why it can't gain even more share. At this point, it looks as though Intel will wind up being the world's leading merchant chip vendor for the tablet market. Once the company works through the bill of materials issues associated with this year's platforms, next year's tablet platforms should be sold for a pretty solid profit per unit.

Datacenter group looking goodWhile there's a lot of hype around ARM (NASDAQ: ARMH) based servers, it's tough to see any of these players competing meaningfully with Intel over the long haul. Intel has a cost structure edge on these players, a wide and deep software compatibility moat, more efficient transistor technology, a larger research and developent budget, and a solid grip on the software and peripheral hardware that is sold as part of a server platform (SSDs, various software, NICs, InfiniBand, etc.). The company forecasts 15% compound annual revenue growth for its datacenter division through 2017, but given that the company has had difficulty hitting this number in recent years, it's probably safer to assume more along the lines of 10%-12%. Still, that's not bad at all for a nearly 50% operating margin business!

Smartphones could be upside, but let's wait and seeBy far the largest-growth market that Intel has open to it is in smartphones. The company has virtually zero smartphone applications processor share, but has been investing heavily over the last three years to try to breach this market. While there's a good chance that Intel can become a viable second source to Qualcomm in this space, the open question is really around the timing.

If Intel can drive a similar campaign to its 40-million-tablet effort with smartphones (perhaps 100 million smartphones) during 2015 with its upcoming SoFIA and Broxton processors, it could drive some rather nice revenue upside (if we assume $15 platform average selling price for phones, this could mean an additional $1.5 billion in revenue). However, this is an area where I'd want to wait on Intel's upcoming investor meeting for additional color.

Foolish takeawayAt $28 per share, Intel trades at about 15 times trailing 12-month earnings. It's not dirt cheap, but if the company can eventually erase the $3 billion per year loss on mobile that it is incurring today (and even drive it to profitability), grow the datacenter group by a low-double digit CAGR, and stabilize PC client group sales, then the stock could easily trade in the mid-$30s to low $40s over the next couple years. That said, there are a lot of "ifs" there, so keeping an eye on the company's execution will be critical.

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Comments from our Foolish Readers

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It's difficult to see how Intel can move up to 15-20% of the tablet market that quickly, or make any significant strides in smartphones. They've botched many of their opportunities previously, cannot get the parts out on schedule, and Qualcomm has locked the most lucrative markets down.

I agree Intel does not have much to worry about with ARM servers. ARM servers have been available for last 4-5 years and only have a nominal percentage of the server market. The ARM server story is hype. They're a tiny, tiny player in the server markets. Intel has much bigger competition that is not going to give away their market share.

@tempest it's not that difficult since INTC is providing a superior chip at competitive prices to makers willing to use their products. I believe that Intel Inside ® still has that cachet especially to white box mfg who have never had access.

@guest1, it is difficult to see. Intel has a nominal portion of the mobile market. To say Intel can explode sales like that when there is still debate they can properly decode/recode Android apps, they've failed to get distribution out on their stated timeframes, and there is lead time necessary on parts availability for manufacturers to release the goods, yes that is difficult to see. Just because they are big in PC's does not mean they are efficient in their supply chain.

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Ashraf Eassa is a technology specialist with The Motley Fool. He writes mostly about technology stocks, but is especially interested in anything related to chips -- the semiconductor kind, that is. Follow him on Twitter: Follow @TMFAeassa